Then would I be better off switching to TIPS, or is it basically the same?
Also, I have some old 6% savings bonds about to mature. Will they continue to grow at 6% after the date of maturity (next year), or do they go to some new way of computation?
Thanks, thirdage
Hi Third Age,
TIPs and I-Bonds are very different. They both offer inflaion protection, but there are several differences. TIPs are taxable in the current year, as to interest, and I believe as to stepped up value (inflation adjustment). So, if they are held outside a retirement account, you wind up paying income tax on book gains, with no offsetting cash to help you pay the bill. If your income is below the taxable level that would not be a problem.
Also, while TIPS guarantee that that they will be redeemed at least at face value at maturity, prior to maturity if you want to sell them, and if the country has been in a deflationary environment rather than inflation or stable prices, you could lose money. Similary, if real interest rates should rise, the real coupon on your tips would be worth less, and they could go down in value, relative to their theoretical inflation adjusted value.
Several years ago I bought TIPs with a core, non-adjusted yield of 3.4%. And a year or so prior to that, they sold with a core coupon of 4%. That may never happen again, but still it does demonstrate that the value of these bonds is subject to market forces.
I-Bonds, on the other hand lock in a value every 6 months. Afterwards, they will not fall below this value. So for example, if some time you have a bond with a core interst rate of 2% pa, and during the six month period we experience a deflation of 3% pa, your bond will not lose value. It will be worth whatever it was worth at the start of the 6 months. If you should redeem an I-Bond before maturity, you get the accumulated value, as long as you have held it for 5 years. On redemption after 1 year, but before 5 years, you lose 3 months interest.
Another important difference is that I-Bonds are tax-deferred. You don't pay until redemption, so you will have the cash to pay the tax.
For me, I-bonds are better than TIPs outside of a retirement account, given reasonably equivalent core interest rates.
The next question is, are I Bonds a better deal than EE bonds? Currently, with their very low core interest rate, probably not. I saw a study based on 50 years of data, which took the rules for I bonds, and the rules for EE bonds, and tried to determine which would return the most. Overall, if the core rate on the I-Bond is greater than 2.6%, take the I-Bond. If it is lower than 2.25%, take the EE bond. Tweeners are kind of a no-man's land where it could go either way. Although I Bonds are adjusted for inflation, and EE Bonds are not explcitly, EE Bonds adjust to current medium term interest rates by virtue of the fact that the interest rate floats, based on the 5 year T-note. Also, if interest rates should be so low that the EE Bond has not doubled by its 20 year maturity date, the treasury makes a one time adjustment to bring it up to its face value.(Face value is 2x purchse price in EE Bonds.) In effect, this gives an interest rate floor of about 3.6%.
To answer your other question about maturity- all Savings bonds have a maturity date, but they usually earn interest beyond this date. However, there is another date beyond which they will not earn interest, and they should be redeemed. Here is a chart-
E May 1941 - November 1965 -40 years
December 1965 - June 1980 -30 years
H June 1952 - January 1957-29 years, 8 months
February 1957 - December 1979 -30 years
Savings Notes All issues 30 years
EE All issues 30 years
I All issues 30 years
HH All issues 20 years
For any information about savings bonds, see:
http://www.publicdebt.treas.gov/sav/sav.htm
I hope this is helpful to you.
Mikey